Mental Rut - what to do next?

Hey guys,

I've got a bit of a dilemma on my hands and hoping for some advice please. My partner and I have 2 IP and our PPOR . Equity is quite healthy especially in this market, but salaries are pretty average so borrowing capacity maxing out around 600K.

Our bank just told us our next purchase will tap us out of the market for next 10years unless we get large pay increases (not likely). The thought of buying another IP excites me, but being as we are cash flow stressed at the moment, I am not jumping at the opportunity to get our 3rd IP.

Another struggle is we are both male so having children to occupy our lives for the next 20-30 years is not going to happen. So the thought of sitting on my arse during this covid period, waiting 30years for these mortgages to pay themselves down only to live a 'comfortable' retirement is a little depressing. I'm 33 WANTING to work to continue to build our portfolio not to sit back and wait for retirement. The dream would be to amass so many properties it becomes my full time job, researching, buying, renovating, selling etc.

So my question is how can I keep adding to my portfolio without banks telling me I need to move into the 'waiting and paying down phase'? Note 1 of my IP is a townhouse which I was never keen on in the beginning (bought through family). I am considering selling it which would free up around 100K cash after taxes which would open up more options.

Options I am considering. Please add better options if you know of any. Should I:
1.) Buy a renovator, possibly add bedroom then test market to sell for profit under 3months.
2.) Buy a renovator, move in for 1year slowly adding value then trying to sell.
3.) Buy another quality IP (no work needed) and be patient.
4.) Buy a home out in the sticks to move into (Turn PPOR into IP) and focus on quality of life such as building my chicken coop, raising my puppies, big veggie patch, bees etc.

Any other thoughts on best way to move forward? Note I do work in renovations so am quite handy on the tools.
Cheers

 

Read up on the forum. There's lots you can do, but you will need to put in some effort. Remember, you never go broke, making a profit, so you may have to buy & sell in order to move forward, rather than keeping on buying.

If you are good at renovating, this could be your 'thing'. You could buy a dump, move into it, renovate, then sell & move onto the next dump. You could buy something with subdivision potential & unlock profits. There's more than one way to skin a cat.

 

My first step would be to stop talking to the 'bank'. Get a good broker to see what's going to be possible for you - when one bank might say no, if structured correctly you might be able to go a lot further than you think.

You can also consider debt recycling strategies to help pay off your home loan ASAP - non-deductible debt is a killer for borrowing capacity, so the quicker you can get it gone while still increasing your asset base, so much the better.

 

If u buy in Ur own town buy something and add value. It is good for ur portfolio and Ur sense of achievement. Hard-working ppl do that often, own place or IP.

Subdivide, reno, granny flat, garage conversion...all work.

Buying and sitting doing nothing might suit user rich .... most normals have to work at it!!

Good luck,!!

 

Going to rhe bank directly will only give you one option, going to a broker will give you multiple options.

If its a major lender the informed you thag you're capped. I assure you that there are other lenders out that that's able to give you more.

 

Very very very hard to do these days. APRA killed that and comprehensive credit reporting screwed over and killed all the investor dreams of building huge portfolios. Its near impossible now to build 10+ property portfolio post APRA with all their requirements for loans and the values you need to use for monthly expenses etc...

Of course you might hear about 1 or 2 ppl doing it because they have huge cashflow, make a killing in their business or 9-5 job but for most budding investors who want to build massive portfolios that's a dream of the past.

One possible way is to continuously buy a dump, do a reno or build a duplex and flip. And use the profit to buy more properties to hold with little liability. This method in itself costs a lot of money and if you flip within 12 months you lose your CGT discount.

The best and easiest way to grow your portfolio now imho is pay down debt and earn more money so your serviceability will pass.

 

Our PPOR is definitely not our dream home. The dream is to move to Hawaii or Gold/Sunny coast hinterland on a big lot with rolling hills, over looking the ocean or big lake. But it was bought with a 10yr plan, so we renovated the whole house ourselves spending over 100K on it to get it to our liking. Only on year 3 going on 4 and feeling like an idiot for wanting to move having spent so much capital to fix it up! Hindsight is 20/20.

Thankfully we got a great deal, bought the worst house in the street for 500K and currently it would sell around 800K so we have done well. It is 10ks from Brisbane city so I always thought smarter to hold long term for capital growth. It's also only a 2bed house also so rental yield will not be great once we move out, around 500per week. Now I'm considering selling it ...haha great another option for me to obsess over JUST WHAT I NEEDED!!

My partner is very easy going and get's excited about whatever I get excited about. So when I say I think we should buy another IP he start's googling properties right away His preference would be to stay here and buy a cheap house to quickly renovate and try to sell. If we can't turn a decent profit then just hold and have it as our 3rd IP. Thing is, I've convinced him that we are never selling this home...now I'm thinking we need to revisit this conversation to open up more pathways

I have also considered updating our most recent IP. It is tired and outdated, but I bought it with a granny flat potential so prefer not to sell. Rent would also only go up maybe 30$ per week on a 20K minor facelift. Not really worth the hassle I think.

 

I went through a broker for 1 of my IP's. He was really great until I went back and asked about buying a quick reno/flip. He said he doesn't do loans for quick flips. I think he mentioned he doesn't get paid or has to repay his profits to the banks if the house sells under 2years? Is this not the same profit management style for most mortgage brokers? Please tell me if it isn't because I just made an appointment with St George for Thursday

I did consider debt recycling, but I no longer plan on living in my PPOR for more then 2years more. Plan was 10years but year 3 now and wanting a change. Recently got 2 puppies, and I built a beautiful backyard with 0 real grass. Small courtyard with fake lawn, massive gardens and BBQ pergola. The poor thing's don't know what real grass is yet

 

Cheers, I think I will set up a meeting with mortgage broker soon then

 

That's a lot of money to spend on a little 2 bedroom house. I'm guessing you don't have any DIY skills?

You could put a GF in which would give more income.

Flipping houses is most profitable if you have the skills to do some of it yourself. The best bang for buck you can give a house is often paint, and paint is cheap. Maybe when your IP is vacant you can try your hand at painting. Just start with one room, in case you mess it up. Look at tutorials if you need to, and practice skills.

 

I have almost every trade skill, minus accreditation. We bought with plan to remodel kitchen/bathroom. It turned into a whole house strip. Only thing that remained were some beautiful art deco ceiling plaster. I was a rookie when I started but I work in the industry as well, so have helped renovate other properties through work. I also have all the tools now. I know I over capitalised but like I mentioned it was all done with a living here 10year plan. I also never had any advice from parents / friends on how / what I should renovate. Learnt a lot, which is key.

I am leaning towards a 300-400K quick flip now, just to try my luck at it. Put all I've learnt to use to see if we can turn a profit. Problem is with this market everything has increased so much in the past year, finding a profitable flip will be difficult.

 

Agree, but equally If not more important to its success (imo) is to be able to do an accurate feasibility on costs and determine a realistic sale price .

I know many folks who have a zillion more skills than myself when it comes to the renovation work side but make massive errors with their feasibility (or worse they don't do one) and they inevitably lose money or break even if their lucky. I have zero technical skills renovating and have always managed to make a healthy profit due to good planning and managing processes and people.

I guess my point is, reno skills alone is usually not enough to have a project successful at the end point.

 

I agree, but my comment was based on a spend of $100k for a two bedroom house. I can't conceive spending that much unless it was an upmarket place, which it could be, as I don't know the area. Hence my suggestion that maybe he learn a few skills since most of the two bedroom homes I've seen wouldn't require that level of spend, even with tradies doing the work.

At the end of the day, as you said, you've got to make sure that the project will be successful. Part of the feasibility is to learn not to overcapitalise.

My reno's and your reno's are at opposite ends of the spectrum, so I'm guessing the OP is somewhere in the middle.

 

Hi @skater oh I agree. I was only meaning to make the point that regardless of how technically skilled someone is with tools, if they can't cost correctly, they could easily make a loss. I think my comments were actually echoing your concerns of adding 100k to a 2 bedroom house. Unless (and hopefully) an accurate feasibility by the OP was taken into account.

 

Well, he did state that it was a PPOR, so, as far as I'm concerned, you can decorate or add/subtract value to your heart's content if it's for yourself. The real issue is, can you be objective and turn an ugly duckling into a beautiful swan, if your personal taste not that of a beautiful swan......or can you look at something beautiful that costs a lot, but compromise and get something for 1/10th of the price, but equally suitable so that you don't overcapitalise.

 

Medusa, what do you actually want to do? Perhaps the strategy ought to be working back from your end goal. it's difficult to advise what the goal ought to be.

If your goal is option 4, then have a strategy to get to that end point (the bees, the puppies etc).

Now, if your goal is to accumulate multiple IP's, then that goal would require something different, starting with a good mortgage broker (as Jess mentions above).

These days where you can't harvest equity in the old days without having income to support it, then flipping or renovating is one of the few ways to accumulate a large asset base. It sounds like you have the know how to do this, and have an excellent chance of succeeding with this strategy. Go for it.

 

Imho you lack the clarity what it is you're after (your goals) and have some internal conflicts.

"The dream would be to amass so many properties it becomes my full time job, researching, buying, renovating, selling etc."

Then you state,

" Buy a home out in the sticks to move into (Turn PPOR into IP) and focus on quality of life such as building my chicken coop, raising my puppies, big veggie patch, bees etc"

So what's the goal? Going hardcore with RE or getting better acquainted with the chooks and veggies in the sticks?

 

A bank officer is an employee with the mindset that goes along with it and their allegiance is to the bank, not you. As mentioned above, best practice is to engage an investment savvy mortgage broker, plenty on here to choose from, and don't have to be local to you with technology circumventing that.

Option 1 or 2 sounds right up your alley.

 

Sometimes one strategy if you are BOTH onboard is to make reno of your own home the goal. It allows you to live in the capital and improve it and limit the tax issues. The problem is living like that can drive some crazy and patience and vision is needed...and the cash to devote to do it properly. You also need to be very targetted in finding a property that is livable while being renovated. Not a "full reno" dwelling as then it fails if you cant live-in. eg Less "The Block" and more "Love it or List It". It may even help to sell off the t/house to free up some cashflow to assist this. Then rather than accumulation you leapfrog upwards...ie a property ladder taking on a increased size, location etc as you go. Just dont get committed to a "forever home" with this strategy.

One major plus is you dont have the "OMG there is a baby" issue other couples face when they least expect it. Good luck to you both.